Friday, 2 October 2015

What’s a Medium Term Note?

Medium-term note or MTN is when a debt note maturity period
is 5 – 10 years, though technically the repayment duration or maturity period
could be less than a year to a 100 years! These debt notes can be issued on
floating or fixed coupon basis. Floating rate MTNs are either simple where the
coupon is aligned

Euribor +/- basis points or it could be notes with complex
structure and linked to indices, swap treasuries, etc. If they’re issued to investors who aren’t
residents of the US, they’re termed "Euro Medium Term Notes". Issuing
MTNs to US-based investors calls for a US MTN program.

MTNs can come with fixed maturity date or come with put
options, embedded call wherein MTNs could be redeemed per pre-accepted terms or
speculations. MTN is usually issued for unsecured investment debts, with fixed
rates, though it offers flexibility to both the issuer and investor when it
comes to documentation and structure. While many use bank instruments for PPP
and have an idea of how MTNs work, many don’t know how it really works! It is
funny how they’re rising in popularity and many deploy it for different
purposes, without knowing how these instruments work or what it really is! Matthew Roddan of Project Ninety Nine explains MTNs are
a great way to get into PPP, especially since not many have the funds required
to invest in PPP from their resources. Since PPP is gaining exposure and many
would like to know if or not PPPs are what stuffs that make a mythical legend,
let’s understand MTNs better.

According to Matthew
Roddan, many aspire to invest in PPP but end up being unable to do so by trusting
wrong people (brokers) or because they don’t have enough resources. The former
is truer and why many think PPPs don’t exist. So, let’s understand MTNs better
and how they can be used for PPP. MTNs are instruments of debt issued by banks
and are sold to investors with a good face value, annual interest rate and
maturity date. So, if you hold a note from Bank of America that’s worth 100
million, with interest rate of 7% each year, you will get 7 million till the
instrument matures, after which you can cash it for its worth!

While MTNs are very similar to debt notes, it is more
popular because of its price, flexibility, resale potential and option to be
bought at a discount instead of its face value. According to Matthew Roddan from Project Ninety Nine, MTNs are
available for more than fifty years and can effectively compete with any bank
instrument. Since they were available for discounted rate, it became popular
after “trading bank instruments” gained notoriety in the secondary market. PPP reign
began soon after and Internet has made it even more popular and widely
available. If you have an interest in PPP, MTNs Project Ninety Nine are your go-to
option.